Britain's fledgling recovery may be nipped in the bud by the savage cuts
planned to grapple with the mountain of public debt, the International
Monetary Fund has warned.

Official figures on Thursay provided the first clear evidence of positive momentum in the economy, but forecasters warned of "headwinds" from planned tax rises and spending cuts to shrink Britain's £155bn budget deficit, and the IMF on Thursday slashed its growth forecasts for the UK.

Manufacturing posted its fastest annual growth in more than 15 years, according to the Office for National Statistics, while economic output in the three months to June was the strongest it has been since the recession struck, the latest monthly estimates from the National Institute of Economic and Social Research (NIESR) showed.

However, NIESR warned of "headwinds [as] fiscal consolidation both in the UK and the euro area restrict growth". "There is clearly a risk that this rate of growth will not be maintained through the rest of this year," the economic forecaster said.

NIESR's concerns came after the IMF cut its growth predictions for the UK by more than any other major country in the world and warned that "growth prospects in advanced economies could suffer if an overly severe or poorly planned fiscal consolidation stifles still-weak domestic demand".

The Bretton Woods institution revised its predictions for the UK in 2011 from 2.5pc to 2.1pc, below the Treasury's own forecast of 2.3pc, prepared by the independent Office for Budget Responsibility. The IMF has also trimmed its projections for this year from 1.3pc to 1.2pc, in line with the OBR outlook.

Capital Economics' chief European economist Jonathan Loynes warned: "With forward-looking survey indicators of activity in both the industrial and service sectors recently softening – and the effects of the enormous fiscal squeeze yet to kick in – the second quarter may turn out to be as good as it gets."

Manufacturing grew at an annual rate of 4.3pc during May, the highest since December 1994, after expanding by 0.3pc over the month, according to the Office for National Statistics (ONS), helping lift the FTSE 100 for a third consecutive day to 5105.45, up 90.6 on Thursday and 5.5pc on the week.

However, survey data for June indicated that confidence weakened following the Chancellor's plans to squeeze £113bn out of the economy through tax rises and spending cuts.

Economists warned that the Bank of England may need to restart its £200bn quantitative easing programme to help carry the economy through a period of lower growth. Gerard Lyons, Standard Chartered chief economist, said: "The UK economy is going to slow significantly, that should not be a surprise given the fiscal tightening. If the IMF is correct, then it justifies leaving rates unchanged and increasing quantitative easing."

All advanced economies, bar the US, saw their 2011 forecasts lowered due to concerns about sovereign debt and a second financial crisis. It stressed that reducing national deficits is vital and that countries must "must make further credible progress".

Contagion from Europe's problem economies to the banking sector would spell disaster, potentially triggering a crisis of 2008 proportions that would wipe 1.5 percentage points off global growth, it added.